Is the United States Federal Reserve, central bank to the greatest economy in the history of the world, insolvent? Ayup, technically it is, writes James Grant in the latest number of his famed newsletter, Grant’s Interest Rate Observer. It’s a wonderful read. Let’s hope that someone manages to get a copy of it to President Trump before a Democratic candidate gets in ahead of him on this issue.

Mr. Grant, who holds an honorary doctorate in acerbic studies, has pressed this point in an open letter to Wm. C. Dudley, who was until recently the president of the New York Federal Reserve Bank. Now he’s an economist at Princeton. Mr. Grant was moved to write by an op-ed that Mr. Dudley wrote and that appears on Bloomberg under the headline “Let’s Stop Worrying About the Fed’s Balance Sheet.”

That’s a fine note from the officer who was leading the Fed’s most important regional bank during the years when the Fed plunged toward its current predicament. The Fed, after all, has been paying out millions to accountants to produce its blasted balance sheets. Now that the ledgers show the bank is a busted flush, one of its top professors turns around and says not to worry about the balance sheet.

That strikes us as not only self-serving but self-satisfied. The reason we’re not supposed to worry about it, after all, is because we live in the age of fiat money. Or irredeemable electronic paper ticket legal tender (as it is called by Larry Parks of the Foundation for the Advancement of Monetary Education). Such scrip enables the central bank to print endless amounts of money to cover its largesse.

The scale of this was described in an article by Alex Pollock in American Banker. Mr. Grant cites the piece, which notes that in December the Fed disclosed that it had, as Mr. Pollock put it, “$66 billion in unrealized losses on its portfolio of long-term mortgage securities and bonds (its quantitative easing, or QE, investments), as of the end of September.”

That amounts, Mr. Pollock notes, to “170% of the Fed’s capital” and means “on a mark-to-market basis” that “the Fed had a net worth of negative $27 billion.” If long-term interest rates rise by 1%, Mr. Pollock estimates, “the Fed’s mark-to-market loss would grow by $200 billion more.” The question, he suggests, is “does this deficit matter?” No, say all the economists with whom Mr. Pollock is acquainted.

Such economists, Mr. Pollock reports, reckon that whenever the Fed needs more money it can just print some up. “Even if the banks took out currency, it wouldn’t matter, because currency is just another liability of the Fed, being Federal Reserve notes,” Mr. Pollock adds. “All of this is true, and it shows you what a clever and counterintuitive creation a fiat currency central bank is.”

Which brings us back to Mr. Grant. He ends his piece with an expression of admiration for the classical gold standard. He quotes a study from the Fed itself that, in 1959, suggested that under the gold standard, as Mr. Grant summarized, “a currency derived its strength from the integrity of the balance sheet of the central bank that issued it.” On whose integrity is the world relying in the age of Trump?

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Image: Drawing by Elliott Banfield, courtesy of the artist.